Although the banking industry's compliance with the Community Reinvestment Act has become the subject of intense government scrutiny and heated public debate, not much of anything said is positive.
While community organizations condemn the industry's track record of lending to low-income and moderate-income groups, the industry complains of both overregulation by the federal and state governments and virtual blackmail by community organizations protesting bank applications.
Regulatory agencies have criticized banks' CRA efforts and have significantly beefed up CRA enforcement. State legislatures (including New York's) have enacted mini-CRAs to encourage lending to the underprivileged.
Where's the Beef?
Articles and editorials appear daily debating the pros and cons of federal CRA policy. No one seems to believe that CRA is producing any significant results.
Congress seems gridlocked on CRA, which has become a political hot potato. Members of Congress who urge deregulation and relaxation of CRA are dismissed as unsympathetic to the needs of underprivileged Americans and as catering to a banking industry that has enjoyed record profits in recent times. Worse, they risk alienating a voting constituency that condemns a perceived credit crunch and demands a responsive, consumer-oriented banking industry. Those members who urge heightened enforcement of CRA are accused of unfairly persecuting a banking industry already burdened by an enormous load of recent legislation and regulation.
Flurry of Bills
The Clinton administration and Congress continue to press for major CRA reform, although there is no consensus on what "reform" is appropriate. A flurry of CRA bills have been introduced this term, each advocating a different approach.
Various congressional sub-committees are holding hearings to scrutinize the industry's compliance with CRA. Members of Congress lament the current state of affairs and urge their individual concepts of CRA reform.
Many of the proposals dwell on the negative aspects of CRA -- more regulation, tougher examinations, higher penalties. These proposals seem to favor a bigger CRA stick compelling banks to lend more in underprivileged areas.
CRA is widely touted by bankers as the single most costly regulation imposed on the industry. Given the cost of the current CRA structure and the complaints over its inefficiency, is there any movement toward constructive CRA reform? If Congress is really serious about a positive CRA, it ought to put. its money where its mouth is.
In a long-overlooked provision of the Federal Deposit Insurance Corporation Improvement Act of 1991, Congress agreed to do just that. Section 233 of the FDICIA, part of the Bank Enterprise Act, actually rewards banks for CRA efforts by creating a direct financial incentive for banks to "greenline," or extend credit in an identified economically troubled geographic area.
In this respect, section 233 represents a welcome carrot among the many sticks waved by Congress, the administration, and the regulatory agencies.
The act, comprising several isolated provisions within FDICIA, was the result of a bipartisan amendment to that legislation. Section 233 was written by Rep. Floyd H. Flake, D-N.Y., and Rep. Thomas J. Ridge, R-Pa. Added in the House Banking Committee to 1991 HR 6, section 233 survived a floor challenge by Rep. Willis D. Gradison Jr., R-Ohio.
Although the Bank Enterprise Act survived the challenge by the narrowest of margins (205-204), the act ultimately died when HR 6 itself failed in November 1991.
The Bank Enterprise Act was reborn when it was added, at the insistence of the House of Representatives, to 1991 S 543, the bill that became FDICIA.
A Big |Carrot'
Described by Rep. Ridge as a market-oriented, incentive-based approach" to CRA reform, section 233 provides a direct financial reward to a bank that increases its lending in financially disadvantaged communities.
The act authorizes a deposit assessment credit equal to 5% of the bank's increase in qualifying loans (subject to a maximum credit of 20% of the bank's total deposit assessment). Section 233 also provides for the creation of a five-member Community Assessment Credit Board to administer the program.
Rep. Ridge argued that this federal investment in CRA would reap hundreds of millions of dollars in new investment activity in financially disadvantaged communities.
For some inexplicable reason, a bipartisan Congress that backed the Bank Enterprise Act's "carrot" approach to CRA chose never to implement it. A loophole in the act provided that section 233 would not become effective "until appropriations are specifically provided in advance." Congress never appropriated those funds. At most, in a July 1992 report. the House Committee on Appropriations recommended a meager $1 million "to begin preliminary study, design. and development of the Bank Enterprise Act."
Congress never explained why it neglected to fund its latest CRA reform legislation when it received bipartisan support from its members. It seems that, perhaps for political or budgetary reasons. Congress was willing to pass section 233 and take for CRA reform. but i s not willing to fund it.
A bill introduced July 22 in effect told Congress to put up or shut up. The bill, HR 2707, introduced by Rep. Flake and Rep. Jim Leach, R-Iowa, proposes to finally fund section 233.
The bill seeks $382 million in funds -- the same amount originally sought by the Clinton administration's community development proposal. HR 2707 directs $191 million -- half of the total package -- to fund the Bank Enterprise Act. The remainder would be used to fund a network of community development financial institutions.
HR 2707's funding of section 233 would provide for an immediate and tangible financial stimulus to aid financially distressed communities.
Banks serving such communities would have a significant financial incentive to increase lending in those communities, without enduring an additional layer of regulation. Section 233 seems to create an appropriate compromise to the controversy between those who urge less (or, at least, no further) regulation of banks and those that urge greater lending in financially distressed communities.
New Powers Proposed
HR 2707 contains several other significant provisions. Banks providing financial services to financially distressed communities would be provided insurance and securities powers. In addition, the bill provides for a safe harbor that immunizes banks from a CRA protest if the bank has received a CRA rating of "outstanding."
The bill also would create substantive performance-based standards for rating a bank's compliance with CRA.
The bottom line for Congress should be: Any legislation that leads to increased investment in financially disadvantaged communities is positive CRA reform. By funding section 233, HR 2707 should do just that. Before it invests in any more CRA sticks, Congress should ask itself whether the investment in these sticks will lead to a comparable increase in community investment.